Tax Free Income Strategies
As we see it, there is an order of priority to maintain and gain your wealth. First, start early and, then, invest wisely. So, let’s take a few minutes and talk tax free income strategies. It is important to understand that some types of retirement vehicles are better suited than others for tax-deferred, or tax-free strategies.
Depending on your life situation and financial goals, each portfolio will be weighted a bit differently to be effective. Regardless, there are some basics that we see commonly suited for the average retirement portfolio. First, and foremost, let us prioritize. If you can invest in a financial product that gives you free money such as a company match, do it! Remember Rule #1: Don’t lose the money? This also means – don’t lose out on the money.
Once you have done your research and fine tuned your financial strategy, you have taken a major step in creating a solid retirement. Next, you must keep your hand on the wheel of the ship. With your hand on the wheel while staying conscious of your goals, you can quickly and easily adjust your course as you steer through the unexpected twists and turns of life’s ocean.
Fitzwilliams Financial is here to help send the wind to your sails, and help you smoothly glide through the waters of your financial well-being.
Take Any “Free Money” Available
The available free money options are your first priority. You can get free money, for example, from investments like your employer offered 401(k). Many employers offer a matching 401k deposit, or percentage of deposit, up to a certain limit. We highly suggest you collect all the “free money” available from these types of options.
Tax-deferred means the transaction, whatever the terms of that may be, will be taxed at some later date. For example, an employer’s 401(k) is tax-deferred since deposits are made with pre-tax dollars. In this situation, taxes are paid on withdrawals. A traditional individual retirement account (IRA) is another example of a tax-deferred investment. The popularity of tax-deferred investments is that they allow compounding to increase your earnings.
On the other hand, let us look at how it is possible to draw retirement income tax free. Using a tax-free income product means that you will not be taxed on withdrawals, if you adhere to the terms and conditions. Depending on your situation, typically, the less attractive long term vehicles are those that are taxed at a higher tax bracket.
At Fitzwilliams Financial, we prefer the advantages of tax free income. We know that tax-free income options are definitely worth investigating, to achieve an effective and balanced financial portfolio. Tax diversification is key to preparing for the unstable road ahead.
Types of Tax Free Investments
So, let’s talk more about tax free options. Most people have heard of the standard Roth IRA, and some employers even offer a Roth 401(k). Another product that many people do not usually think of that can have tax-free income features are life insurance policies. In summary, certain types of vehicles offer greater tax advantages than others, depending on the client’s situation.
Our key strategy for tax free income is to leverage the 7702 tax code. Few people know that the 7702 tax code says that life insurance benefits to a person are tax exempt. *For this reason, an Index Universal Life (IUL) policy is an attractive product for “overfunding.” Overfunding means the excess deposits earn interest based on an index. With an IUL you build income while, simultaneously, protecting your family in the event of a unexpected financial situation.
The best approach for any client is to do the research, and learn a little bit about how the universal life insurance, and the other options, work. Next, put some deep thought into the type of strategy best for your unique situation to reach your retirement goals.
To protect your assets and family in your inevitable absence, time is on your side. Learn more about how you can leverage your tax free income options with an Index Universal Life (IUL) insurance policy. Visit our Life Insurance page for more information, or give us a call for a free consultation to discuss your tax-free income options.
*Contact our legal or tax department for more information. The policy owner may access the living benefits of the insurance policy in a number of ways (the tax results assume the policy is not a Modified Endowment Contract) including:
- Surrendering cash value of paid-up additions: These funds will be received income tax free up to the policy owner’s basis. Further surrenders will result in ordinary income.
- Borrowing against the contract: Loans can be received income tax free with no interest depending on the options selected. Repayment of the loan is due upon the death of the insured, thereby reducing the total death benefit paid to the beneficiary. The total death benefit can be the accumulated cash in the policy plus the original specified face amount minus any loans or withdrawals taken from the policy. At such surrender, tax may be due depending on the policy owner’s basis and total cash value. If the policy lapses with a loan, the outstanding loan amount is considered cash received and may be taxable depending on the taxpayer’s basis.